Conservative media have attacked financial reform legislation under consideration in Congress by stating that it establishes a "permanent bailout" or "bailouts forever" -- echoing language recommended by Republican strategist Frank Luntz to derail the bill. But far from encouraging "bailouts" for failing financial firms, the bill would establish the government's authority to liquidate them.

Luntz: "[T]he single best way to kill any legislation is to link it to the Big Bank Bailout." As The Washington Post's Ezra Klein pointed out, assertions that the financial regulation bill sponsored by Sen. Chris Dodd (D-CT) provides for a "permanent bailout" or "bailouts forever" echo advice from a January memo by Republican strategist Frank Luntz. The Huffington Post reported that "Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform" and that "Luntz wrote. 'Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout.' "

Wash. Times op-ed: Bill would create "a permanent bailout program." In a March 25 op-ed in The Washington Times, the Heritage Foundation's James Gattuso wrote that the financial regulation bill "would extend 'too big to fail' while in effect creating a permanent bailout program." Gattuso later stated: "The Senate bill would create a $50 billion fund to be used to help finance these forced liquidations to soften the blow for some creditors. Supporters say this funding would be used only in the rarest of cases. Nonsense. If governments have access to money, they tend to use it. This is nothing more than a permanent TARP (Troubled Asset Relief Program) fund."

Wall Street Journal op-ed: "The Dodd Bill: Bailouts Forever." In an April 7 Wall Street Journalop-ed, headlined "The Dodd Bill: Bailouts Forever," Peter J. Wallison of the American Enterprise Institute and University of Pennsylvania law professor David Skeel wrote: "The Dodd bill provides for a $50 billion fund, collected in advance from large financial firms, that will be used for the resolution process. In other words, the creditors of any company that is resolved under the Dodd bill have a chance to be bailed out. That's what these outside funds are for."

Human Events: "The Dodd bill would actually create a permanent, $50 billion emergency fund to rescue or unwind firms." In a March 29 article on HumanEvents.com under the headline "A Permanent Bailout of Wall Street," Brian Darling of the Heritage Foundation wrote:

The Dodd bill would actually create a permanent, $50 billion emergency fund to rescue or unwind firms deemed to be a threat by the new Financial Stability Oversight Council. Explicit financial support of the largest firms by the federal government encourages risky behavior and skews the market place, resulting in progressively riskier and larger firms.

Freddoso: "Just call the Dodd bill what it is: a permanent TARP bailout." In an April 2 Washington Examinercolumn, David Freddoso, referring to TARP, stated that the bill establishes a "permanent TARP bailout."

[T]he Dodd bill creates a $50 billion slush fund to "reorganize" -- read: "bail out" -- large institutions that are failing. Republicans, if they are wise, will oppose this version of financial regulatory reform on these very grounds. It calls on the Main Street taxpayer to bail out the Masters of the Universe (and their European creditors) yet again. What they really need is to go bankrupt. The Dodd bill -- call it "TARP III," if you like -- sides with big business and against free markets.

And please, please, do not use the words "too big to fail" when you talk about this bill. Most people don't understand what that means -- they're just as likely to take the phrase literally as they are to know it really means "too big to letfail." Just call the Dodd bill what it is: a permanent TARP bailout.

Rather than encouraging "bailouts" for failing financial firms, Dodd bill would establish authority to "liquidate" them

The Dodd bill makes bailouts less likely by empowering regulators and increasing transparency, raises a $50 billion fund from banks to pay for future too-big-to-fail bankruptcies, and then makes the outcome a predictable punishment rather than a chaotic rescue. That last is known as "resolution authority" -- as bloodless a word as one could possibly imagine -- and it wipes out both shareholders and management. It's all there in Section 206 of the bill: "Mandatory Terms and Conditions for All Orderly Liquidation Actions." What we call "resolution" would better be described as "execution."

Bill calls for orderly "liquidation" of failing financial companies, not bailout. Dodd's bill calls for the government to have the "necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard," including a $50 billion liquidation fund, paid for by industry assessments, to finance the orderly liquidation of large financial services firms. It further states that this authority:

[S]hall be exercised in the manner that best fulfills such purpose, with the strong presumption that --

(1) creditors and shareholders will bear the losses of the financial company;

(2) management responsible for the condition of the financial company will not be retained; and

(3) the Corporation and other appropriate agencies will take all steps necessary and appropriate to assure that all parties, including management and third parties, having responsibility for the condition of the financial company bear losses consistent with their responsibility, including actions for damages, restitution, and recoupment of compensation and other gains not compatible with such responsibility.

Sen. Warner: Companies taken over under bill's "resolution" authority would be "gone." In an interview with Klein, Sen. Mark Warner (D-VA) stated:

Resolution ... will be so painful for any company. No rational management team would ever choose resolution. It means shareholders wiped out. Management wiped out. Your firm is going away. At least in bankruptcy, there was some chance that some of your equity would've been retained and you could come out in some form on the other side of the process. The resolution that Corker and I have tried to create means the death of the company. The institution is gone.

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